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Bank Mergers, Information, Default and the Price of Credit


  • Margarida Catalão-


This paper addresses the impact of bank mergers on the price of firm credit, through an information channel. It is shown that, as bank mergers imply a wider spreading of information among banks concerning firms' past defaults, they may increase the expected revenue from lending. Therefore, interest rates may decline as long as a sufficiently competitive environment is preserved. A fall in interest rates, in turn, reduces the incentives for firms to strategically default, which reinforces the downward effect on the price of credit. The results are a function of the level of information sharing and of the sensitivity of the default probability to the interest rate. Copyright Banca Monte dei Paschi di Siena SpA, 2006

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  • Margarida Catalão-, 2006. "Bank Mergers, Information, Default and the Price of Credit," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 35(1), pages 49-62, February.
  • Handle: RePEc:bla:ecnote:v:35:y:2006:i:1:p:49-62

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